In the af­ter­math of the fi­nan­cial cri­sis, the Eu­ro­zone re­lied on Ger­many to push up its eco­nomic growth rate. How­ever, in the ab­sence of a pick-up of growth in France, Italy and the pe­riph­ery, this over-re­liance on Ger­many is start­ing to be­come an is­sue, ac­cord­ing to the PwC monthly Global Econ­omy Watch.

The Novem­ber GEW re­port arises from two main is­sues:

• Even with rea­son­ably strong growth rates in Ger­many in re­cent years, the Eu­ro­zone hasn’t man­aged to grow faster than 1% since 2011 and as a re­sult its GDP re­mains smaller than im­me­di­ately be­fore the fi­nan­cial cri­sis;

• Ger­many has it­self slowed re­cently and faces longer term de­mo­graphic and eco­nomic chal­lenges that could drag down its po­ten­tial growth rate start­ing from around 2020.

Fo­cus­ing on Ger­many, the PwC GEW an­a­lysts down­graded their main sce­nario GDP growth pro­jec­tion from 1.5% to 1.2% for 2014 as there are tan­gi­ble signs that ex­ter­nal shocks (no­tably the Ukraine-Rus­sia sit­u­a­tion) have af­fected its short­term out­look. In Oc­to­ber, for ex­am­ple, the ZEW In­di­ca­tor of Eco­nomic Sen­ti­ment slumped into neg­a­tive ter­ri­tory for the

ex­plained

that

the con­cern first time since Novem­ber 2012. This is ex­pected to have wider im­pli­ca­tions on the Q3 Eu­ro­zone GDP fig­ure which will be an­nounced on Fri­day, Novem­ber 14.

The GEW au­thors think that, in the long-run, Ger­many has three main chal­lenges it needs to over­come to main­tain ro­bust eco­nomic growth rates. Th­ese are: 1. Un­favourable de­mo­graph­ics: Ger­many’s work­ing-age pop­u­la­tion is ex­pected to shrink by around 8 mln peo­ple be­tween 2010 and 2030; 2. Low in­vest­ment to GDP ra­tio in­vest­ment rates be­low those of coun­tries; and, 3. Poor labour pro­duc­tiv­ity in the ser­vices sec­tor com­pared to France and the UK (which is, how­ever, off­set by Ger­many’s in­ter­na­tional ex­cel­lence in the man­u­fac­tur­ing sec­tor).

So, where is growth in the Eu­ro­zone go­ing to come from? In the short-term, the out­look for the other core economies, which make up close to 40% of Eu­ro­zone GDP, is look­ing weak.

Italy has fallen into its third re­ces­sion since 2008, although with its pub­lic the other core the PwC an­a­lysts ex­pect it to grow mod­estly in 2015 in their main sce­nario. France has stag­nated for the first two quarters of 2014 and, in the ab­sence of sub­stan­tial re­forms to its prod­uct and labour mar­kets, its out­look re­mains poor.

“In fact, we cal­cu­late that, in a down­side sce­nario where France and Italy fail to grow next year, Eu­ro­zone growth could av­er­age just 0.8% as com­pared to our cur­rent main sce­nario pro­jec­tion of just over 1%,” the PwC re­port said.